Kenneth Boulding is reputed to have said that “Economists know the price of everything and the value of nothing”. There is no place where this statement would be more appropriate than in environmental issues. Economics is at the stage where it treats relative market prices as proxies for value. Our aim in this short post is not to challenge whether there ought to be a better measure of value but simply to point out that this metric poses tremendous challenges in environmental economics since so many of the environmental services do not get captured by the market. We have acted for a long time as if these huge environmental costs do not exist simply because we have chosen not to recognize them.
Well, this has changed a bit. Such major externalities lead to inefficient allocation of the resources and so many environmentalists and non environmentalists have been asking that we find ways to value these non-market activities that are usually on the cost side. As a result we have developed many mechanisms such as Contingent Valuation methodology and created property rights ; permit to pollute, that will force corporations to take these external costs into account.
The problem worldwide could be huge. A recent estimate by a study co-sponsored by the United Nations Environmental Programme, UNEP, has shown that if the worlds’ 3000 largest corporations were to account for the environmental damage that ensues from their activities then at least 1/3 of their profits would have to be wiped out. That would amount to over $2.2 trillion. In some cases the value of these negative externalities will more than compensate for all the profits. In a study by the New Economics Foundation it was estimated that the combined profits of Shell and BP for the year 2006 ; $40 billion; would cover just 57% of the damage bill; $70 billion.
How would we value the marginal ton of carbon that might act as a tipping point to the delicate climate balance? Is it possible that the whole exercise of valuing natural services is a vulgar one?
